Misbuying insurance

Our new report highlights a mismatch between customer expectations of insurance and the reality, leaving a growing number of customers with policies that don't meet their needs.

The insurance industry provides an incredibly important service for its customers, protecting people against risks that they can’t afford to protect themselves from alone.

But its reputation has suffered over the past few years, with levels of trust declining. There’s often a feeling amongst customers that insurers are there to wriggle out of claims when they need them.

That’s not a fair reflection of the industry – or at least not all of it. But the changing nature of insurance products, and perhaps more importantly the change in the way that consumers buy these products, is creating a mismatch between what consumers expect from insurance and what it delivers.

In the first section of our new report, published today, we look to better understand how insurance has changed in recent years. This is not an easy research task to deliver – as providers don’t keep a public log of how their products have changed, and there’s not been a huge body of academic research on the retail insurance industry.

The changing nature of insurance

So back in 2016 we started collecting our own data – creating vast spreadsheets of the cover levels, fees and excesses of all retail insurance products in the travel, car and home insurance sectors. We used software to track changes and over the subsequent 15 months, we found a small but significant number of examples of cover levels being reduced, or – more commonly -excesses or fees being increased.

Excesses for escape of water are perhaps the best example of what we would describe as the ‘hollowing out’ of insurance products. Interviews with experienced underwriters revealed that these were rare 20 years ago. Today, a £250 escape of water excess is common, and during the time we have been tracking the data, we have seen a number of examples of large insurers raising this to £350.

Another way that we believe hollowing out manifests itself is by new providers coming onto the market and offering insufficient cover levels for certain perils. For example, the cost of transporting a body back to the UK if a policyholder dies abroad is in the region of £2,500. But there are now a significant minority that offer much less than this – in some cases as little as £750.

Although claims for this peril may be very low – imagine the experience of someone who’s partner dies abroad, only to be told that their travel insurance policy won’t pay the full cost of transporting their loved one back home to be buried by their family.

Eliminating the bad news stories

In my experience, insurers generally do stand by customers when it comes to the core risks. When thousands of people were evacuated from their homes during the Somerset Levels floods of 2013/4, insurers were standing by to provide temporary accommodation and get the repairs done.

But it’s the minority of bad news stories that leave the industry with a poor reputation. These are the ones that hit the headlines. In the case of those travel insurance policies without adequate cover for something as basic as bringing your deceased loved one home, they are a bad news story waiting to happen.

Another area where things have changed over recent years is the level of fees and charges – which have on average risen by around 50% over the last decade – and by much more in some individual cases.

Consumer perceptions

In the second part of our report, we look at consumer perceptions of these complex products -surveying 2000 customers from across the UK through our research partner Opinium. We wanted to explore whether consumer understanding was keeping up with the changing nature of the industry?

What we found was a picture of confusion. Some 30% of consumers, for example, believe that wear and tear of their property will be covered by their home insurance – when in fact this is a blanket exclusion across the industry.

In car insurance, some 95% of policies will offer you a courtesy car while yours is being repaired, but only 15% will provide one if it is stolen or written off in an accident. Customers were completely unaware of this distinction. And over a third of customers didn’t expect the insurer to cover all the costs of a courtesy car in either scenario.

Poor understanding of the industry is compounded by the way which consumers buy these products. Both comparison sites and insurers are working hard to keep journeys as frictionless as possible – to ensure the customer converts.

This means question sets are not detailed enough and comparisons on price are not necessarily for packages which meet the customer’s needs.

Whoa there!

We believe the process needs to slowed down – with comparison sites given the freedom to ask more detailed question sets, without fear of being brought into the advice regime. Consumers need to be able to compare total packages that meet their needs – with no add-ons left to be tacked on once they’ve moved forward into the captive environment of the insurer’s website.

We believe there also needs to be some scrutiny over the information that is provided to consumers on comparison sites. Ratings like Defaqto and reviews.co.uk are ubiquitous – but we believe these are not always rigorous or designed with the customers best interests in mind. There’s no scrutiny over sample sizes on survey based ratings, and no scrutiny over methodology on expert ratings. Yet thousands of consumers base their purchases on these ratings all the same.

Thirdly, we’d like to see insurers being held to account against the outcomes of Treating Customers Fairly – as well as the even higher bar set by the Insurance Distribution Directive, which says insurers have to act in their ‘customer’s best interests’. Our transparency research has found that insurers are often falling a long way short of providing the kind of disclosure that can help their customers make informed decisions.

Setting expectations clearly

Much more work needs to go into setting customers expectations clearly.

And that leads neatly onto our final ask – which is that companies are put under greater pressure to communicate clearly with their customers. That’s not just about policy documents in plain English (although that is important). It’s also about giving customers the right amount of information, in the right format, at the right time.

Most mobile journeys are simply not optimised to help customers make an informed purchase. Yet purchases through mobile devices are rising.

Insurers need to be able to demonstrate that they have done everything they can to help their customer make the best decision. Honestly, I think we are still a long way from that point.

So that’s a summary of the report. Please take a look and let us know what you think.

At today’s launch event, around half the room believed that hollowing out of insurance products is a myth. We’d love to hear what you think.

This blog was based on a speech given at the launch of our Misbuying Insurance report on 8 February 2018.

About the author

James Daley has been a consumer campaigner and financial journalist for the past 15 years.